Tuesday, May 6, 2014

Gary Becker: Able To Disagree Without Being Disagreeable

This past weekend I toasted Ed Nell at his retirement function at the New School on being "a member of a vanishing species, a true gentleman and scholar of the Old School." The death of Gary Becker reduces by one the size of that species, given that while Ed is now retired, he is still alive and hopefully still active, but Becker is no longer among us.

In making that toast I noted that many now view such a label as ironic or even silly, and few under the age of 40, or maybe even 50, would take it seriously. "Scholar" is one thing and still generally OK when appropriate (clearly so in both of their cases), but "gentleman" is a much more questionable term, with many essentially instantly asuming that its use implies that the person in question is probably a classist or sexist or some other undesirable "ist," and I would probably agree that anybody running around claimng loudly to be one is likely to also be one of these not so admirable "ists." But, with that caveat of being "of the Old School," this means that the person in question is not one of those "ists." They respect others and are polite and friendly to others, even when they disagree with those others. Indeed, the mark of this is being able to disagree without being disagreeable, something that applied to both of these Old School gentleman-scholars.

I did not know Gary Becker at all well. However, I did have a number of professional interactions with him over the years. Most of these involved in some way my editing journals that have behavioral economics as a main theme of what they publish. Justin Wolfers has just posted a claim that Becker was really the frist behavioral economist, even while admitting that he would not have liked to have labeled himself as such. In general, Becker has been viewed by most behavioral economists as "The Enemy," probably the most important and influential scholar advocating a strongly rationalistic approach to economics, even as he took a broad view of what might enter into a person's preferences, which might include altruism and concern for others. In any case, in all my personal and professional dealings with Gary Becker, he was always the utmost gentleman and scholar, able to disagree without being in the least disagreeable, a model gentleman-scholar.

Without doubt, however, Becker introduced into sociology, law, and several other disciplines an approach from economics that emphasized analysis based on a rational agent approach, and the influence of this will continue, and these models certainly serve as benchmarks, even when they are not fully correct. He has certainly been the most important figure since WW II, indeed, possibly in the entire history of economics, to have spread this view, even as he took a moderate view of what constitutes what it is that agents prefer or are seeking to maximze in a possible utility function. I have also heard that he, along with several others of his colleagues at Chicago, were unhappy and dismissive when they received word that the founder of behavioral economics, the late Herbert Simon, had received a Nobel Prize in 1978, although I cannot verify that for certain. Regarding these reported attitudes, I respectfully disagree.

This may not be very proper, but I am going to poke at his broader perspective, not on ideological grounds as many reading this might, but on substantive grounds, while keeping in mind that he always was indeed the perfeect gentleman-scholar (of the Old School). So, Tyler Cowen at Marginal Revolution linked to a 1962 paper by Becker in the JPE, "Irrational behavior and economic theory," which Tyler described as showing that the theorems of economic theory hold even in the face of irrational behavior. I must report that this does not appear to be the case, and that this paper is much weaker in its arguments than I expected, although I suspect Becker would have provided more sophisticated arguments in more recent years.

So, the paper follows strongly on the "survivalist" arguments of Alchian and Friedman, that individuals and firms may not know what they are doing or be engaging in conscious optimization, but that those who survive the best will be those who are in fact coming closest to optimizing. However, Becker pushes the argument further. He identifies "rational behavior" as implying "downward-sloping demand curves," and while later in the paper he refers to this as a "tendency," early in the paper he simply asserts it to be true, no matter what. He does not even recognize the theoretical possibility of Giffen goods, which have since been shown fairly strongly to exist in at least some cases (rice in China for one). I suspect he was listening to George Stigler, who strongly asserted that there were no empirical Giffen goods, and in any case, Becker does not offer any possible exceptions in particular, although using "tend" in places later in the paper. In any case, Becker accepted that individuals might "behave irrationally," with impulse buying his main example, but then argued that they, and especially aggregated markets, and also firms, would nevertheless face downward-sloping demand curves due to budget constraints. Sorry, but no dice.

I note an even more striking possible exception to his claims about downward-sloping demand curves and indeed how these relate back to the fundamental argument about rationality. I am thinking about speculative bubbles. Now, at the time Becker wrote, he was almost certainly under the "survivalist" influence of Milton Friedman who had not too long previously dismissed the idea that speculative bubbles might lead to instability in foreign exchange markets on the grounds that speculators would lose money and be driven out of the market. They would not survive because they would stupidly buy high and sell low. However, we have since learned from DeLong et al that in fact "noise traders" can not only survive but can even be the best performers in a market. Ooops.

And in fact we have seen lots of markets in recent years since Becker's 62 paper that certainly look like bubbles, with the dotcom stock market one and housing markets in many nations more. On the surface, these phenomena look like violations of "the law of demand." Prices rise and people buy more of whatever it is, and vice versa, selling (or buying less) when price falls. We see lots of this out there. This is not all that uncommon. So, the usual explanation in standard views is that the demand curve is shifting outwards, although still downward sloping. It is shifting because ceteris is not paribus, and in particular, expectations are changing. Now, there are some special cases where such shifting expectations mght be rational, but the vast majority of evidence suggests that when we see this, we are not seeing rational behavior but what Minsky and Kindleberger would call a "mania." These are cases where irrational behavior does not result in clearly downward-sloping demand curves. I deeply respect Becker's scholarship and intellect, but on this one he was misguided.

BTW, I cannot resist closing on a personal note. Many years ago, indeed, decades ago, I submitted a paper to a journal about speculative bubble dynamics. The paper was rejected with a referee declaring that if bubbles existed that would mean that Giffen goods existed, and George Stigler had shown that they do not. End of report and basis of paper rejection. And, indeed, as I suggested above, I think Stigler misled Becker on that matter back in those days as well, although Becker may well have changed his mind on these matters in more recent years.

Let me close by noting one more positive aspect of Becker and his intellect. While I disagree (as noted above) with many things he argued, I also recognize that he was consistent in his views. He was not a simple ideologue or party hack, and supported things that many who admire him did not but that were consistent with his broader philosophy. He was indeed, whatever one thinks or thought of his arguments or positions, a genuine gentleman and scholar of the Old School.